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Special Report
Mexico: Tobacco Update
Tobacco Overview:
The tobacco industry plays an important role in the Mexican economy. With nearly 60,000 people employed at the farm level, tobacco ranks third in Mexico in terms of farm income. Beginning in the mid 1990's, Mexico began to privatize its industries. In 1992, Mexico privatized its unmanufactured tobacco company, TABAMEX. The Mexican unmanufactured tobacco sector now consists of Tobacos del Pacifico ( a subsidiary of Universal Leaf), Dimon, and La Moderna. The three leading cigarette manufactures are La Moderna (which maintains a 58.7 percent share of the domestic cigarette market), CIGATAM (40.3 percent), and La Libertad (1.0 percent).
The privatization process has led to an improvement in the quality of Mexico’s leaf tobacco. In 1993, Mexico initiated a new grading and farm-gate pricing scheme for burley and light air-cured tobacco. The new scheme has ten different quality grades in accordance with leaf maturity and cuts and includes some concepts and criteria used in some of the world’s top leaf producing countries. The privatization of the tobacco industry has also caused a change in the farm production of tobacco. Small sized farms are slowly being consolidated into larger ones allowing for the introduction of mechanized methods for planting and harvesting activities. Also, domestic cigarette companies and producers have established production agreements with local tobacco grower organizations in communal lands (ejidos). These agreements now enable different ejidos and growers to participate, sell, and improve efficiency with the use of mechanized equipment for soil preparation. A research program is also being created in order to develop pest resistant burley and flue-cured tobaccos in an effort to reduce input costs. Under these schemes, cigarette companies expect to reduce production costs, increase yields, and have better control on planted area.
There are four tobacco producing states in Mexico. Nayarit is the main tobacco producing state and grows primarily burley, flue-cured, light air-cured, and oriental type tobaccos. Chiapas produces burley, flue-cured, and dark air-cured tobacco. Sonora produces flue-cured tobacco and Veracruz produces dark air-cured. In past years, Oaxaco produced oriental tobacco, but high production costs have eliminated oriental tobacco production in this area. Farmers see leaf production as more profitable than other alternative crops such as dry beans and horticulture products. Favorable grower prices, credit at no cost, and technical assistance to tobacco growers provide an incentive for farmers to grow tobacco.
In 1990, Mexico signed a bilateral trade agreement with the United States called the North American Free Trader Agreement (NAFTA). Under NAFTA, Mexico converted its import license regime for tobacco and tobacco products imported from the U.S. and Canada to a tariff. U.S. and Canada tobacco and tobacco products exported to Mexico will be assessed a 50 percent import tariff which will be reduced to zero in equal installments over a 10 year transition period.
Mexico exports burley and dark air-cured tobacco. Mexico’s primary burley exporting companies are Tobaccos del Pacifico, Dimon, and La Moderna. These companies finance growers to produce burley for export. In addition, U.S. cigar companies finance dark air-cured tobacco for exports.
Because of an increase in the demand for cigarettes and cigars, imports of leaf tobacco have been increasing. Mexico imports flue-cured, oriental, and dark air-cured tobacco. The main suppliers have been Brazil, Argentina, and Malawi because of attractive prices.
Unmanufactured Leaf:
Over the last three years, Mexico has been expanding tobacco production. In 1996, area planted to tobacco grew to 20,836 hectares and is expected to increase to 25,385 hectares in 1997. This increase in production is due to increased financing provided by foreign buyers to produce burley for export. In 1996, 48,169 tons of unmanufactured tobacco was produced and is projected at 44,293 tons this year, an 8 percent decrease. Much of this decline can be attributed to a high incidence of blue mold and unfavorable weather conditions. Mexico’s leaf imports dropped in 1996 to 2,000 tons, but are expected to double to 4,000 tons in 1997 due to a decrease in the production of domestic leaf and an increase in the production of cigarettes and cigars. Unmanufactured tobacco exports are forecasted to increase by 32 percent in 1997 to 15,308 tons.
Burley:
The devaluation of the Mexican peso has helped improve the demand for Mexico’s burley tobacco in international markets. Since 1995, farmers have increased area planted for burley. The number of forward contracts is expected to increase 28 percent in 1997 due mainly to an increase in domestic demand. Export forward contracts for burley have remained relatively constant at 14,493 hectares. In 1996, burley production increased to 26,078 tons. However, in 1997 forecasters have predicted that burley production will decline to 23,852 tons. Adverse weather conditions and blue mold problems are factors contributing to this decrease. Burley exports grew nearly 100 percent in 1996 and are expected to grow an additional 15 percent this year.
Flue-Cured:
Flue-cured tobacco area planted is expected to increase by 12 percent in 1997 due to increased demand by cigarette manufacturers. However, poor weather conditions are likely to keep yields lower. Production in 1997 is expected to be up 8 percent. Domestic consumption is expected to increase nearly 17 percent to 14,328 tons. Mexico’s flue-cured imports are expected to remain constant at 500 tons in 1997. In past years, flue-cured tobacco has not been exported. However, this year forecasters predict 250 tons of flue-cured tobacco to be shipped abroad.
Light Air-Cured:
Due to Mexico’s poor economic conditions, the domestic demand for mid and low priced cigarettes is increasing. Light air-cured tobacco is used in greater quantities for lower priced cigarettes. Light air-cured tobacco production was the highest in 1996. Farmers used 5,841 hectares of land to produce 14,764 tons of light air-cured tobacco. However, in 1997 the area planted to light air-cured tobacco is expected to declined to 11,336 tons on 5,755 hectares. Mexico’s domestic consumption of light air-cured tobacco is predicted to increase by 25 percent or 10,719 tons in 1997.
Cigarettes:
Mexico produces both filter and non-filter cigarettes. The production of filtered cigarettes showed a marginal decrease in 1996 and is expect to remain constant at 31,960 billion pieces in 1997. Non-filtered production is expected to increase to 15,040 billion pieces this year, due to a shift from high-priced cigarettes to mid and low priced brands. Lower priced cigarettes are made of lower quality flue-cured tobacco or light air-cured while the high priced cigarettes are a mixture of burley, flue-cured, and some oriental tobacco. Cigarette exports are expected to increase. Exports of both low priced domestic brands and generic cigarette brands are mostly sold to Eastern Europe, Asian, and African countries. Attractive export prices should further increase exports. Beginning in 1995, La Moderna initiated a joint venture with Than Hoa Tobacco factory of Vietnam in order to promote and market the cigarette brand Montana in Vietnam.
Forecasters predicted that Mexico will not import any cigarettes this year. Since 1994, imports have decreased because consumer purchasing power has deteriorated, thus making imported cigarettes less affordable.
Anti-smoking campaigns are present in Mexico. Some public places have band smoking. However, these campaigns have not influenced smoking to any great extent. However, forecasters predicted that the cigarette market will increase at a lower rate than the population growth.
Country Profile:
Area: 1,972,550 sq km
land area: 1,923,040 sq km
comparative area: slightly less than three times the size of Texas
Land boundaries: total : 4,538 km
border countries: Belize 250 km, Guatemala 962 km, US 3,326 km
Coastline: 9,330 km; contiguous zone: 24 nm; continental shelf: 200 nm or to the edge of the continental margin; exclusive economic zone: 200 nm; territorial sea: 12 nm
Land use: arable land: 12 %; permanent crops: 1%; meadows and pastures: 39%; forest and woodland: 24 %; irrigated land 51,500 sq km (1989 est.)
Population: 95,772,462 (July 1996 est.)
Population growth rate: 1.87% (1996 est)
Age structure:
0-14 years: 36%(male 17,732,725; female 17,125,562)
15-64 years: 59%(male 27,562,285; female 29,165,138)
65 years and over: 5%(male 1,911,968; female 2,274,784)(July 1996 est.)
Economic overview: Mexico experienced strong economic recovery after the 1994 peso crisis. Economic indicators show that Mexico is on the road to recovery. The peso strengthened against the U.S. dollar in recent months. Inflation dropped from 52 percent in 1995 to 12 percent in 1997. Real GDP growth increased to 4.8 percent in 1997. Industrial activity rose 11.2 percent during the April to June period. The Government of Mexico created a program to concentrate on the long term Mexican economy. Mexican President Ernesto Zedillo presented the National Program of Financing for the Development 1997-2000 (Pronafide). The new program projected that the economy will grow an average of 5 percent a year until the year 2000. Pronafide is based on four main strategies: the promotion of private savings; consolidation of public savings; modernization of the financial sector; and the exportation of goods
GDP: purchasing power parity-$721.4 billion(1995 est.)
GDP real growth rate- 6.9% (1995 est.)
GDP per capita:$7,700(1995 est.)
GDP composition by sector: agriculture -8.5%; industry 28.4%; services 63.1%
Inflation rate (consumer prices): 52% (1995 est.)
Labor force: 33.6 million(1994) by occupation: services 31.7 %, agriculture, forestry, hunting, and fishing 28 %, commerce 14.6 %, manufacturing 11.1% ,construction 8.4%, transportation 4.7%, mining and quarrying 1.5%
Unemployment rate: 10%(1995 est.) plus considerable underemployment
Budget: revenues: $56 billion (1995 est.) expenditures:$54 billion (1995 est), including capital expenditures of $NA
Industries: food and beverages, tobacco, chemicals, iron and steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism
Industrial growth rate: -7.5%(1995 est.)
Agriculture: corn, wheat, soybeans, rice, beans, cotton, coffee, fruit, tomatoes; beef, poultry, dairy products; wood products
Exports: $80 billion(f.o.b.,1995 est), includes in-bond industries
commodities: crude oil, oil products, coffee, silver, engines, motor vehicles, cotton, consumer electronics
Imports: $72 billion(f.o.b., 1995 est), includes in-bond industries
commodities: metal-working machines, steel mill products, agricultural machinery, electrical equipment, car parts for assembly, repair parts for motor vehicles, aircraft, and aircraft parts
Prepared By: Arnella Trent, Tobacco Analyst for Latin America, Cotton, Oilseeds, Tobacco and Seeds Division, Foreign Agricultural Service, USDA. (202) 720-9496
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